Cost of Capital and ROI

Regardless of the type of business financing you have been offered, it’s critical to know what the total cost of capital is for that deal and to assess it in the context of projected ROI.

Spearfish specializes in securing factoring, PO financing, and supply chain financing for our clients. Typically rates range from little over 1% - 3%. Total cost of capital is made transparent when an offer is presented.

Thanks to credit insurance, factoring through Spearfish adds no debt to your balance sheet, making it a unique form of financing.

B2B and B2G businesses should consider forms of financing that are not loans and do not add debt. Interested parties are invited to schedule a free phone consultation with us to explore these alternatives.

Fees for debt-based financing can quickly add up. Let’s take a look at some examples.

Debt-based financing

Many business owners do seek debt-based financing and increasingly, from online providers. In these scenarios it’s not always easy to calculate total cost of capital.

Some online lenders provide online calculators to give a general sense of the range of rates. Let’s take as an example, a 50k term loan from one of the best-known online providers.

This particular provider uses what they call a “fee rate” which is expressed as a percentage. (On their website they provide an explanation of how this “fee rate” is calculated.)

The calculator offers options ranging from 1.5% to 10%. Let’s choose 3% – which sounds low – to see what our total cost will be. The loan terms offered by that provider are 6, 12, or 18 months.

Term length Total fees
6 months $5,500
12 months $12,750.00
18 months $19,125.00

Depending upon the details of your offer, you may or may not have a choice of term length.

ROI Context

Let’s assume that you can only afford the monthly payments for the 18-month option. Is this a good deal or a bad deal?

Since business debt is a tool to accomplish goals, you can only decide this in context.


  • The context of the goal
  • The context of projected ROI that you stand to earn
  • How the offer compares to other options you are eligible for

The 18-month loan comes with a $19,125.00 price tag. Let’s imagine that the owner has carefully calculated a lowball ROI of $125k on this loan. In this scenario, the owner will come out over $105,000 ahead if the loan is taken. Put another way, the business owner pays $19,125.00 in order to earn a profit of approximately $105k.

Of course there’s inherent risk here: namely, that the low-ball ROI projections hold true, and no unforeseen risks arise, such as the spread of the coronavirus pandemic, which few businesses were well-positioned to ride out.

Can the business owner do better than this offer? It depends on what types of financing the owner qualifies for, and what the total cost of capital is for those other offers.

Online lenders' fees

Since online lenders vary considerably in the ways that they calculate fees, it’s difficult to compare them without having an offer in hand and being clear about the total cost of capital.

As an example, another online lender does not provide an online calculator, and charges a flat 15% fee on top of other fees. And yet, even though “15%” sounds much higher than “3%,” for those with good credit the latter deal would likely have a much lower cost of capital.

Those with stellar credit would ordinarily choose to obtain a loan from a community or other bank, due to the low rates available. However, if the owner has been in business for under two years, they would not be likely to qualify for such loan. And if they need the funds immediately, they would look to other sources.

SBA loans and bank loans

If debt-based financing is what you are seeking, your best bet is a traditional bank loan or SBA loan. Typically, these loans are harder to qualify for, take much longer or process than online loans, require considerable paperwork, and require good credit.

The recent development of the Paycheck Protection Program (PPP) has altered many of these standards for SBA loans. The bottom line, is, the best deals on term loans are usually from traditional banks and SBA loans (which are also provided by banks).

Looking for financing options? Book a free phone consulation with one of our staff.

AR management, bundled with your factoring

Federal Reserve: Small Business Lending Survey

Fed Small Business